Commodities

With equity markets tumbling, escalating tensions between a Saudi-led Sunni bloc against Iran, ongoing hostilities in Syria, North Korea testing what it claims to be a hydrogen bomb, the once precious yellow metal is looking perky.

Gold recorded a six-year low in early December (on the same day the euro fell to $1.0525 when the ECB met). That low (~$1046.45) retested a fortnight later (~$1047.75). Between the two lows, gold reached almost $1089. If this is a double bottom, the minimum measuring objective is near $1132.

Anglo American, one of the largest mining companies in the world, has announced a restructure that will cut 85,000 jobs worldwide, a reduction of its workforce by almost two-thirds. The move follows a huge downturn in commodities prices, which have been decreasing since 2011 and have hurt the revenues and profits of mining companies across the globe.

The US dollar has exhibited one of the most impressive trends that the currency market has seen over the last year, as the greenback has risen close to parity relative to the euro on several occasions. Since the dollar maintains its position as the world’s reserve currency, this creates ripple effects in a number of different markets. For investors, this is important because it means not all markets are likely to perform at the same rate into the final months of the year.

The price of gold rallied by about 5.25% off the five-year low set in late-July near $1172 an ounce to the high set earlier today. More than half this rally took place this week, seemingly in response to the heightened uncertainty as China changed its currency regime.

Not so long ago, gold rose to new highs. Recently, it has suffered the most challenging losses since 1999. The Fed’s rate hikes do not bode well for the gold in the near term, but what about in the medium-term?

Gold prices have tumbled to a five-year low. As a tradeable commodity, the price of gold is largely linked to supply and demand. While supply remains fairly fixed, demand is shaped by the state of the global economy and investor perceptions of gold’s value as an asset – this is in turn shaped by the strength of the US dollar.

The price of gold is essentially unchanged from where it finished last year. There have been several interesting developments. Of particular note, China, India and Russia were significant buyers last month.

It appears that the UK exported gold to Switzerland, where it was refined and then shipped to China and India. Russia continues to accumulate gold even as its hard currency reserves fall.

In a previous article I posted a chart from the International Energy Agency’s recent Oil Market Report that shows global demand for refined products catching up to supply by the 3rd quarter of this year. My opinion is that all of the analysts who are now blaming the sharp drop in oil prices on a “glut” of supply could change their tune quickly as consumers adjust to lower fuel costs. Just as higher costs reduce demand for any commodity, lower costs will increase demand.

The price of oil has steadied in recent days after making new lows on Tuesday. The March WTI futures contract approached its 20-day moving average earlier today (~$52.30) for the first time since late November. This was a new selling opportunity as it has reversed lower. We are looking for lower prices and it would not surprise us to see the price of WTI fall to the late-2008/early-2009 lows in the $32-33 area.